Finance,
Applications and Theory
6th Edition
by Marcia Millon Cornett
Complete Chapter Solutions Manual
are included (Ch 1 to 20)
* There is no Solution for Ch. 1
** Immediate Download
** Swift Response
** All Chapters included
, CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
Questions
LG2-1 1. List and describe the four major financial statements.
The four basic financial statements are:
1. The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time.
2. The income statement shows the total revenues that a firm earns and the total expenses the
firm incurs to generate those revenues over a specific period of time—generally one year.
3. The statement of cash flows shows the firm’s cash flows over a given period of time. This
statement reports the amounts of cash the firm generated and distributed during a particular
time period. The bottom line on the statement of cash flows―the difference between cash
sources and uses―equals the change in cash and marketable securities on the firm’s balance
sheet from the previous year’s balance.
4. The statement of retained earnings provides additional details about changes in retained
earnings during a reporting period. This financial statement reconciles net income earned
during a given period minus any cash dividends paid within that period to the change in
retained earnings between the beginning and ending of the period.
LG2-1 2. On which of the four major financial statements (balance sheet, income statement, statement of
cash flows, or statement of retained earnings) would you find the following items?
a. earnings before taxes - income statement
b. net plant and equipment - balance sheet
c. increase in fixed assets - statement of cash flows
d. gross profits - income statement
e. balance of retained earnings, December 31, 20xx - statement of retained earnings and balance
sheet
f. common stock and paid-in surplus - balance sheet
g. net cash flow from investing activities - statement of cash flows
h. accrued wages and taxes – balance sheet
i. increase in inventory - statement of cash flows
LG2-1 3. What is the difference between current liabilities and long-term debt?
Current liabilities constitute the firm’s obligations due within one year, including accrued wages and
taxes, accounts payable, and notes payable. Long-term debt includes long-term loans and bonds with
maturities of more than one year.
LG2-1 4. How does the choice of accounting method used to record fixed asset depreciation affect
management of the balance sheet?
, Firm managers can choose the accounting method they use to record depreciation against their
fixed assets. Two choices include the straight-line method and the modified accelerated cost
recovery system (MACRS). Companies often calculate depreciation using MACRS when they
figure the firm’s taxes and the straight-line method when reporting income to the firm’s
stockholders. The MACRS method accelerates deprecation, which results in higher depreciation
expenses, lower taxable income, and lower taxes in the early years of a project’s life. The
straight-line method results in lower depreciation expenses, but also results in higher taxes in the
early years of a project’s life. Firms seeking to lower their cash outflows from tax payments will
favor the MACRS depreciation method.
LG2-1 5. What is bonus depreciation? How did the Tax Cuts and Jobs Act of 2017 temporarily extend
and modify bonus depreciation?
Since 2001, businesses have had the ability to immediately deduct a percentage of the acquisition
cost of qualifying assets as "bonus depreciation." This additional depreciation deduction was
allowed to encourage business investment. However, bonus depreciation was a temporary
provision; the rate would have been 50 percent in 2017, 40 percent in 2018, and 30 percent in
2019, before phasing out in 2020. The Tax Cuts and Jobs Act of 2017 extended and modified
bonus depreciation, allowing businesses to immediately deduct 100 percent of the cost of eligible
property in the year it is placed in service, through 2022. The amount of allowable bonus
depreciation will then be phased down over four years: 80 percent will be allowed for property
placed in service in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
MACRS or straight-line depreciation is applied to any costs that do not qualify for bonus
depreciation.
LG2-1 6. What are the costs and benefits of holding liquid securities on a firm’s balance sheet?
The more liquid assets a firm holds, the less likely the firm will be to experience financial
distress. However, liquid assets generate little or no profits for a firm. For example, cash is the
most liquid of all assets, but it earns little, if any, return for the firm. In contrast, fixed assets are
illiquid, but provide the means to generate revenue. Thus, managers must consider the trade-off
between the advantages of liquidity on the balance sheet and the disadvantages of having money
sit idle rather than generating profits.
LG2-2 7. Why can the book value and market value of a firm differ?
A firm’s balance sheet shows its book (or historical cost) value based on Generally Accepted
Accounting Principles (GAAP). Under GAAP, assets appear on the balance sheet at what the
firm paid for them, regardless of what assets might be worth today if the firm were to sell them.
Inflation and market forces make many assets worth more now than they were when the firm
bought them. So in most cases, book values differ widely from the market values for the same
assets—the amount that the assets would fetch if the firm actually sold them. For the firm’s
current assets—those that mature within a year―the book value and market value of any
particular asset will remain very close. For example, the balance sheet lists cash and marketable
Applications and Theory
6th Edition
by Marcia Millon Cornett
Complete Chapter Solutions Manual
are included (Ch 1 to 20)
* There is no Solution for Ch. 1
** Immediate Download
** Swift Response
** All Chapters included
, CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
Questions
LG2-1 1. List and describe the four major financial statements.
The four basic financial statements are:
1. The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time.
2. The income statement shows the total revenues that a firm earns and the total expenses the
firm incurs to generate those revenues over a specific period of time—generally one year.
3. The statement of cash flows shows the firm’s cash flows over a given period of time. This
statement reports the amounts of cash the firm generated and distributed during a particular
time period. The bottom line on the statement of cash flows―the difference between cash
sources and uses―equals the change in cash and marketable securities on the firm’s balance
sheet from the previous year’s balance.
4. The statement of retained earnings provides additional details about changes in retained
earnings during a reporting period. This financial statement reconciles net income earned
during a given period minus any cash dividends paid within that period to the change in
retained earnings between the beginning and ending of the period.
LG2-1 2. On which of the four major financial statements (balance sheet, income statement, statement of
cash flows, or statement of retained earnings) would you find the following items?
a. earnings before taxes - income statement
b. net plant and equipment - balance sheet
c. increase in fixed assets - statement of cash flows
d. gross profits - income statement
e. balance of retained earnings, December 31, 20xx - statement of retained earnings and balance
sheet
f. common stock and paid-in surplus - balance sheet
g. net cash flow from investing activities - statement of cash flows
h. accrued wages and taxes – balance sheet
i. increase in inventory - statement of cash flows
LG2-1 3. What is the difference between current liabilities and long-term debt?
Current liabilities constitute the firm’s obligations due within one year, including accrued wages and
taxes, accounts payable, and notes payable. Long-term debt includes long-term loans and bonds with
maturities of more than one year.
LG2-1 4. How does the choice of accounting method used to record fixed asset depreciation affect
management of the balance sheet?
, Firm managers can choose the accounting method they use to record depreciation against their
fixed assets. Two choices include the straight-line method and the modified accelerated cost
recovery system (MACRS). Companies often calculate depreciation using MACRS when they
figure the firm’s taxes and the straight-line method when reporting income to the firm’s
stockholders. The MACRS method accelerates deprecation, which results in higher depreciation
expenses, lower taxable income, and lower taxes in the early years of a project’s life. The
straight-line method results in lower depreciation expenses, but also results in higher taxes in the
early years of a project’s life. Firms seeking to lower their cash outflows from tax payments will
favor the MACRS depreciation method.
LG2-1 5. What is bonus depreciation? How did the Tax Cuts and Jobs Act of 2017 temporarily extend
and modify bonus depreciation?
Since 2001, businesses have had the ability to immediately deduct a percentage of the acquisition
cost of qualifying assets as "bonus depreciation." This additional depreciation deduction was
allowed to encourage business investment. However, bonus depreciation was a temporary
provision; the rate would have been 50 percent in 2017, 40 percent in 2018, and 30 percent in
2019, before phasing out in 2020. The Tax Cuts and Jobs Act of 2017 extended and modified
bonus depreciation, allowing businesses to immediately deduct 100 percent of the cost of eligible
property in the year it is placed in service, through 2022. The amount of allowable bonus
depreciation will then be phased down over four years: 80 percent will be allowed for property
placed in service in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
MACRS or straight-line depreciation is applied to any costs that do not qualify for bonus
depreciation.
LG2-1 6. What are the costs and benefits of holding liquid securities on a firm’s balance sheet?
The more liquid assets a firm holds, the less likely the firm will be to experience financial
distress. However, liquid assets generate little or no profits for a firm. For example, cash is the
most liquid of all assets, but it earns little, if any, return for the firm. In contrast, fixed assets are
illiquid, but provide the means to generate revenue. Thus, managers must consider the trade-off
between the advantages of liquidity on the balance sheet and the disadvantages of having money
sit idle rather than generating profits.
LG2-2 7. Why can the book value and market value of a firm differ?
A firm’s balance sheet shows its book (or historical cost) value based on Generally Accepted
Accounting Principles (GAAP). Under GAAP, assets appear on the balance sheet at what the
firm paid for them, regardless of what assets might be worth today if the firm were to sell them.
Inflation and market forces make many assets worth more now than they were when the firm
bought them. So in most cases, book values differ widely from the market values for the same
assets—the amount that the assets would fetch if the firm actually sold them. For the firm’s
current assets—those that mature within a year―the book value and market value of any
particular asset will remain very close. For example, the balance sheet lists cash and marketable
